SAP FSPL - IFRS 17

Imagine implementing SAP Financial Product Subledger (FPSL) for IFRS 17 compliance as a journey inspired by the divine names in the Vishnu Sahasranamam, where each configuration, integration, and report reveals the depth and completeness required in achieving financial and regulatory accuracy. Here’s how SAP FPSL can guide an insurer step-by-step through this complex landscape, fulfilling obligations under IFRS 17, with careful configuration and detailed month-end closing activities.

1. Foundation Setup – ‘Sahasra Sirsha’ (Thousand-Headed Vishnu): The All-Encompassing Data Foundation

The name “Sahasra Sirsha” symbolizes the all-knowing, pervasive Vishnu. SAP FPSL mirrors this in its master data configuration, encompassing every critical detail needed for accurate insurance accounting. Key data elements include:

• Insurance Contracts: Every contract recognized in FPSL must meet IFRS 17’s criteria and might require unbundling if components fall under other standards (e.g., IFRS 9 for financial instruments or IFRS 15 for revenue from contracts).
• Actuarial Portfolios and Cash Flow Projections: Defining actuarial portfolios is crucial, as future cash flows drive contract valuations and liabilities.
• Legal Entities and Business Transaction Types: Ensuring proper assignment and categorization at the legal entity level to capture details essential for correct reporting and consolidation.
• Chart of Accounts and Document Currency: Configuring the chart of accounts in alignment with multi-GAAP and IFRS 17 reporting, ensuring all transactions and revaluations occur in the appropriate currency.

The foundational master data setup is integral to accurate reporting, supporting comprehensive subledger integration with the general ledger for clear, compliant financial disclosures.

2. Contract Recognition and Measurement – ‘Ananta’ (Eternal): Setting Boundaries and Measurements

The name “Ananta” suggests eternity, just as insurance contracts have long-lasting financial impacts. Contract recognition and measurement within FPSL determine the scope and method of accounting for each insurance contract under IFRS 17. This stage involves:

• Initial Contract Recognition: All contracts are recognized either at coverage start or upon the first payment, reflecting the policy’s financial initiation.
• Measurement Models:General Measurement Model (GMM): The default model, calculating liability through projected cash flows, discounting, and risk adjustments. Premium Allocation Approach (PAA): A simplified model used for short-duration contracts, with little variability before claims.Variable Fee Approach (VFA): Applied to direct-participation insurance products where policyholders share in investment returns.

Accounting entries for recognized contracts include setting the liability for remaining coverage (LRC) and liability for incurred claims (LIC), supporting accurate revenue recognition based on the passage of time or risk release. Contractual Service Margin (CSM) ensures unearned profits are deferred until services are rendered.

3. Integration of Actuarial Data – ‘Vishvam’ (All-Encompassing): Encompassing Risk and Forecasts

Vishnu as “Vishvam” embodies everything in the universe; similarly, FPSL’s actuarial integration must encompass all cash flow projections and risk assessments:

• Expected Cash Flow Preparation (ECP): Reads actuarial data for estimates, best cash flow projections, and risk adjustments, ensuring cash flows accurately reflect premium payments, claims, and other contractual outflows.
• Fulfillment Cash Flows (FCF): Includes inflows/outflows (premiums and claims), time value adjustments (discounting to present value), and risk adjustments (compensation for non-financial risk).
• Risk Adjustment: Reflects the compensation for uncertainties in cash flows, using actuarial data to produce risk adjustments compatible with IFRS 17 standards.

These components are critical in establishing financial projections that align with IFRS 17’s valuation requirements, supporting both profitability and compliance.

4. Subledger to General Ledger Integration – ‘Vishnu’ (The Sustainer): Ensuring Ongoing Compliance and Integration

As the sustainer of the universe, Vishnu’s role reflects the FPSL’s function of bridging between the subledger and general ledger, ensuring all data aligns and sustains ongoing reporting requirements:

• General Ledger (GL) Integration: GL Connection: Configured either through a web service or direct accounting interface, connecting FPSL transactions with SAP S/4HANA GL in real-time or via batch processes. Rule Set Mapping: Ensures that subledger data aligns with GL fields, supporting compliance with regulatory reporting standards. Clearing Accounts and Max JE Lines: Configured to handle situations where entries exceed permissible limits, with additional clearing line items to ensure balancing.

The GL integration sustains IFRS 17 requirements for central GAAP, delta GAAP, and reporting, ensuring transparency and traceability of each transaction.

5. Month-End Close – ‘Keshava’ (Controller of Time): Balancing Time and Financial Clarity

As Keshava controls time, month-end close activities control the alignment of FPSL records with accurate financial representations. Month-end processing includes re-evaluations, adjustments, and final reconciliations:

• Remeasurement of Contracts: Contracts are reassessed each month for changes in cash flow projections or discount rates, with updates posted to either Profit & Loss (P&L) or Other Comprehensive Income (OCI).
• Adjustments for Unreconciled Entries: Manual adjustments ensure all entries align with IFRS 17 compliance, correcting errors or differences found during reconciliation.
• Balance Carry Forward: Closes balances for the period, ensuring each contract’s liability or revenue position is correctly stated for the new period.

FPSL automates much of this process, ensuring accurate valuations at the end of each reporting period.

6. Reporting and Disclosure – ‘Sarva Darshana’ (One Who Sees All): Providing Complete Transparency

The name “Sarva Darshana” highlights all-encompassing vision, akin to FPSL’s comprehensive reporting and disclosure abilities under IFRS 17, which deliver transparency for stakeholders:

• IFRS 17-Compliant Financial Statements: Statement of Financial Position: Shows asset, liability, and CSM balances. P&L Statement: Captures insurance revenue, service expenses, and finance expenses.
• IFRS 17-Specific Disclosures: Contract Reconciliation: Displays liability for remaining coverage and incurred claims, essential for understanding profitability. Risk Adjustment Disclosures: Detailed adjustments based on non-financial risks, showing the entity’s approach to risk compensation(ifrs-17-insurance-contr…).

FPSL supports embedded analytics, offering dashboards in SAP Analytics Cloud (SAC) for real-time insights and management reporting. The visual dashboards help executives interpret financial positions, revenue recognition trends, and CSM adjustments across reporting periods.

Conclusion: SAP FPSL as ‘Narayana’ (The Ultimate Shelter)

In the Vishnu Sahasranamam, Narayana represents the ultimate shelter, symbolizing completeness and protection. SAP FPSL, through its structured configuration, comprehensive integrations, month-end close functionalities, and in-depth reporting, acts as the ultimate shelter for insurers needing IFRS 17 compliance. This end-to-end process ensures that every transaction aligns with regulatory requirements, every valuation reflects true financial status, and each report provides stakeholders with clarity and confidence in the financial integrity of the organization.